Tuesday, October 18, 2016

Chipotle reports
next week and we’ll finally get to see how the company’s “buzz-worthy” (their word, not
ours) marketing efforts (like the online game “Friend or Faux,” the “Chiptopia”
rewards program, and the online animated movie “A Love Story”) have been working
to bring customers back after last year’s food-borne illness outbreaks linked
to various Chipotle restaurants caused comp-store sales to tank, spurred a CDC
investigation and forced the self-styled “Food with Integrity” chain to spend a
lot of money upgrading the integrity of its food-handling procedures.

Wall Street, for
the most part, seems convinced the storm will blow over—if a 100-times
next-year EPS multiple is any indication.

Large shareholders have commissioned reports on the company’s turnaround efforts, interviewing food safety experts and “industry
veterans” on the “timeline for Chipotle’s recovery,” as one wrote, and the
consensus seems to be management will eventually convince the American public
that Chipotle really does serve “Food with Integrity,” but safely—and then it’ll be onward and upward, like Jack-in-the-Box
after its deadly e-coli outbreak in 1993.

But actually talking
to Chipotle customers, past and present, about how much they went before the
outbreaks, when they returned, and how frequently they go now, yields a very different
notion of what’s ailing Chipotle than strictly “food safety fears.”

What we hear is
that lapsed customers aren’t so much afraid of getting sick—they just found
other places to go while they were away.

But don’t take
our word for it. According to the recent
semi-annual Piper Jaffray survey of 6,500 red-blooded American teens and their
food and clothing habits, Chipotle ranked as their second-most favored
restaurant chain—even after all that “buzz-worthy” marketing—at 11%, behind
Starbucks at 14% and ahead of Chik-fil-A at 10%, a pretty big shift from the
early 2015 survey, when Chipotle nearly tied Starbucks for first-place at 14%
and was almost twice as popular as Chik-fil-A at 7.5%.

And while your
editor hasn’t interviewed anywhere near 6,500 teenagers, we have talked to
quite a range of Chipotle customers, past and present, around the country.Though
far from being a scientific sample, we found two “buckets,” as Wall Street’s
Finest like to say: the first includes former customers (generally women) who
were offended that the “Food with Integrity” folks had apparently made
customers ill and seemingly wasted time griping about the CDC and/or the press
coverage instead of immediately, contritely and completely dealing with the issue.They either refuse to go back, or, almost
certainly go less than before the outbreaks.

The second
“bucket” is the heavy users (generally young men) who still go—but generally not
as often as before, for whatever reason—some claim the food doesn’t taste as
good as they remembered it; others simply say they just found other places to
go.On the flip side, they say, the
lines tend to be shorter.

In general, the attitude
from both buckets—major fans and occasional partakers—might best be summed up
as “meh.”

Understand,
these are impressions from talking to real people, not a scientific
survey.But we haven’t found a single non-interested
(i.e. Wall Street-type) who has said in no uncertain terms, “It’s still great,
I go back, and I spend as much as I used to.”

Maybe Chipotle
customers are like those Trump voters you hear about who don’t want to admit
they’re voting for him, and maybe most of them are in fact eating as much or
more than they used to, even if we don’t hear it, and maybe Piper Jaffray interviewed
the wrong 6,500 teens.

But there’s one
other way to get a sense of how Chipotle’s “buzz-worthy” marketing is doing
getting customers back to its 2,000+ stores, which for some reason the company keeps growing like a 20% comp company even though comp-store sales are down double-digits
(just ask Boston Chicken how that math works out in the long-run).

Turns out the Texas Alcohol Beverage Commission reports monthly
numbers from every establishment that reports to it, from the lowliest bar to
the biggest chain.

And while beer
sales are a tiny part of Chipotle’s business—never even mentioned on any
earnings call—they are a piece of the business and they depend on customers
walking in the door and buying food to go along with their beer.So while the TABC numbers may not be as good
an indicator of overall sales trends as, say, sales of Coke at McDonald’s would
be, they’re something to look at.

Here’s what we
came up with, on the left, with the company’s actual reported total sales on
the right:

Granted, these
are not “comp-store” sales, nor have we been able to adjust for the collapse in
oil prices, which certainly dinged beer sales in Texas well before Chipotle as
a whole got whacked on the food-borne illness outbreaks.But they’re numbers, and we’ll take them.

Moreover, Pizza
Hut, which likewise sells small amounts of alcohol relative to its food volume
and has a fair number of stores in Texas, showed a slowdown in 2014 in the TABC
data, although not the dramatic collapse like Chipotle:

The point is,
the data make some sense.Which makes it
interesting to try to see how things are progressing more recently.

T

hus far in 2016
the monthly data only runs through July, so we don’t have a full third quarter
to see how far off the bottom sales have leaped following the “Love Story” video
and “Chiptopia.”

But we do
have June and July TABC figures, and comparing the first two months of each quarter
of the year (just for some sort of consistency’s sake) yields the following as
an indication of trends thus far:

In other words,
“meh.”

But we’ll get
the real numbers next week, along with word of whatever “buzz-worthy” marketing
gimmicks come next.

Meantime, we’re
going to hit the Dos Toros at 54th and Lex.Or the one at 52nd and 6th.Or 45th and Lex.Or…

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